The amount of income a customer can take from income drawdown is partly calculated using drawdown gilt yields. In July 2007, drawdown gilt yields peaked at 5.25%.
Customers approaching five year reviews could see their income fall by as much as 55% as drawdown gilt yields are currently 2.5%.
Customers also face the prospect of dealing with lower investment returns and the capping of income at 100% of GAD rates .
Andrew Tully, Pensions Technical Director, MGM Advantage said:
"Customers face the prospect of dealing with a huge hit on their income. Those reaching reviews soon are likely to be the worst hit as drawdown gilt yields peaked in July 2007. Gilt yields are at historic lows, hitting 2.5% in May, due to the financial crisis and the impacts of quantitative easing. They are likely to remain low until there is a resolution to the Eurozone issue."
So what are the options for people currently using income drawdown?
1. Accept the reduction in income in the hope that over time investment performance will mean income increases
2. Top-up their drawdown contract from other savings
3. Phase exit from drawdown into annuity contracts
4. Consider an investment-linked annuity
So how does this look in practice? James was 62 in July 2007. He invested £100,000 in income drawdown and decided to withdraw the maximum income of £8,640 at the start of each year, based on the drawdown gilt yield of 5.25% at the time. James is approaching his 67th birthday in July 2012 when the drawdown gilt yield is likely to be around 2.5%.
The new maximum income in drawdown is calculated using the current gilt yield, the Government's GAD tables, the individual's current age and their drawdown fund value.
The fund value will vary depending on income taken over the last five years and investment returns over that period. The table above shows some example figures. Actual investment performance depends on the funds used; some average investment returns for the period are shown in note 4 to editor.
Andrew Tully commented:
"As people in drawdown are getting older there are a host of viable exit strategies. It may make sense to continue in drawdown, but it may also make sense to consider the newer options on the market including investment-linked annuities which offer certain guarantees and enhanced rates for those with medical or lifestyle conditions.
"People should not feel trapped in drawdown, as other options are available, but seeking professional financial advice is critical."
